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Thursday
Dec302010

A penny for my tax man's thoughts (which, be warned, are frightening).

I have to assume, based on the size of the bill that my accountant has just sent me, that he intends the good advice he has given me to be shared with about a hundred thousand people. So here goes.

Somebody over at the IRS has finally been introduced to the world wide interweb and noticed that Etsy (and Ebay, of course) is making an awful lot of money off of lots and lots of small, under the radar sellers. Starting January 1st, 2011, Paypal will be calculating income and, by years end, reporting it to the IRS. If you haven't already started reporting your income from Etsy or Ebay on your taxes (I put it in the "other income" category, and print out the years transactions for my own records) Now's the time. It will also be more important than ever to keep track of your expenses and costs of goods sold, because you will need to be able to show what an item cost you to make and what costs went to operating your business so that your actual net (ie, taxable income) can be calculated. Lets say for example that you sell something on Etsy for ten dollars that took five dollars to make. The IRS will see the whole ten dollars, it will be up to you to show them what your actual profit was, and that's the number that gets taxed.

As it stands now, sellers bringing in less than $20,000 don't have much to worry about. But just because Paypal won't be sending your records in to the IRS doesn't mean that they won't be aware of your business presence. Clearly, they are paying attention!

Here's the thing about the IRS, and I'm sorry to get a little scary here. If you make the decision to start a business of any size - making or doing or reselling anything in exchange for money - the responsibility to have a full working knowledge of the laws in your town, your county, your state, and your country falls, in their eyes, completely and unsympathetically on YOU. If you owe them money, they will not forgive that debt in exchange for an explanation, unless they can be proved wrong. They do not care if you are a stay at home mom, a student, or a really nice person who didn't know that they were doing anything wrong. They have the power to take away your house, your car, your credit, and your business.

You can read more about this new law here and here. Paypal has it's own explanation on their blog, but honestly it feels like the article downplays the issue a tad bit. I know, it seems a little overwhelming. You'll be able to figure it, and a system for tracking what you owe, out for yourself without hiring an accountant, I promise. Also, Etsy has a great thread about taxes over here. As much as I wish they would do more to warn their sellers about the pitfalls of unintentional tax evasion (and labor laws that pertain to working at home, and the health risks of knitting fifty scarves a week without workers comp insurance, while they are at it), the truth is that it's not their responsibility as a marketplace to do so. Its up to you to protect yourself, which could be the motto of small business in general, no?

 

 

 

References (6)

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  • Response
    Hi, here's an article i wrote which is a guide to tax for small businesses, you should find it pretty helpful =)
  • Response
    Response: keep reading
    heatherross - blog - A penny for my tax man's thoughts (which, be warned, are frightening).
  • Response
    heatherross - blog - A penny for my tax man's thoughts (which, be warned, are frightening).
  • Response
    heatherross - blog - A penny for my tax man's thoughts (which, be warned, are frightening).
  • Response
    heatherross - blog - A penny for my tax man's thoughts (which, be warned, are frightening).
  • Response
    heatherross - blog - A penny for my tax man's thoughts (which, be warned, are frightening).

Reader Comments (20)

Great Post! My only question is this: In paragraph 2, it says this: The IRS will see the whole five dollars... Is it five or ten they will see? I got a wee bit confused here. Thanks so much for a great post!

December 30, 2010 | Unregistered CommenterMarci Girl

Thanks for sharing!
Things are a bit different here in Canada, but, for us Canadians, its actually to our advantage to claim even the smallest amount of income from Etsy as you can then claim a whole slew of business expenses and home business expenses! Everything from your home insurance, heating bills (all prorated of course) to magazine subscriptions that apply to your field. Of course, if I didn't actually work for the federal government, I probably wouldn't have known all of this.

December 30, 2010 | Unregistered Commenterserena

Thank you for sharing this. I plan on opening my etsy shop again and definitely want to make sure I'm legal. :)

December 30, 2010 | Unregistered Commenterstaci

great info, thanks for sharing!

December 30, 2010 | Unregistered Commenterkatherine

There is a lot of new gray area for the IRS to explore. I have been wondering, too, about some of these issues.
What about bloggers and their income? I have noticed blogs like Young House Love and Ana-White where the author is clearly making a living from their blog. Does that mean that the authors can write off all the costs of remodelling their home? I mean, where will the IRS draw the line?
I am trained as an accountant and still, I am almost overwhelmed at how it to track and calculate cost of goods sold.
Yes, all the IRS sees is the Gross Sale. It is entirely up to the entrepreneur to substantiate all expenses and whittle that net taxable income down as low as possible. Then, make quarterly payments to ease the pain.
The US IRS makes it hard on self-employed people.

December 30, 2010 | Unregistered CommenterRobinDenning

Good post! I had heard about this from Ebay, I believe, and was hoping the word got out to folks early. I work doing taxes for a CPA firm & although we don't presently have many clients that this would apply to, I can see the problem of reconstructing 2011 information in 2012. I've had to do this for clients & it's not fun, not to mention probably grossly inacurate.

December 30, 2010 | Unregistered CommenterDianeY

Great post! My husband runs a small business and all laws and taxes can get hugely complicated. It best to have a CPA or an excellent knowledge of the law to make sure you are doing the right thing.

December 30, 2010 | Unregistered CommenterHope

That is good advice, I don't think that there are too many countries that this wouldn't apply to. Any business owner is wise to look into all of the rules and regulations before starting a business, it does stop at the business owner.

December 30, 2010 | Unregistered CommenterSonia

Here in Hawaii for the past two months there was a lot of news about small businesses (craft fairs and farmer's markets) being fined if they did not give receipts to every person and make sure their business licenses were visible - I'm a stay at home mom who just does a bit of crafting on the side but I make sure I keep my receipts in order.

December 30, 2010 | Unregistered CommenterAmber

Thanks for the head's up! This may also be a good place to remind folks that they may owe taxes (depending on their home state laws) for items bought online - even if the item was purchased from an out of state vendor. I live in CA, and we are supposed to pay sales tax on items bought online.

December 30, 2010 | Unregistered Commenterjennifer w.

Great information! Thanks for the heads up, it is much appreciated.

December 30, 2010 | Unregistered CommenterLisa

Lots of self-employment deductions to take. You want to do it that way instead of as "other income" because that will reduce your self-employment taxes, which you will be required to pay.

December 30, 2010 | Unregistered CommenterMrs Lemon

Don't mess with the IRS. I speak from personal experience.

December 31, 2010 | Unregistered CommenterSascha

Thanks for sharing this info Heather. I heard about this, but every time I think about it I want to shut my Etsy store down crawl in a hole and never come out.

I love what you said about knitting 50 scarves in one week, been there done that (hats). It made me laugh!

December 31, 2010 | Unregistered CommenterEma

I'm in the UK and things are the same here - so much so it puts me off of making things to sell. Our tax inspectors do check things like Ebay to see if people are selling a few unwanted goods or running a business. If I was to start making bags or quilts or something and sell them on etsy or similar I'm supposed to register as a business with the tax office even if I end up making no money - I still have to go through all the accounts procedure and justify expenses over profits. As I am employed by another business, to also work for myself would mean extra tax paperwork and more hassle. I suspect a lot of smaller traders on Etsy etc are clueless and think because they are not making a living or just doing it as a hobby it doesn't count as a 'business' or make them liable for income tax.

December 31, 2010 | Unregistered CommenterJan

Heather, thank you for sharing this. I opened a tiny Etsy shop a couple years ago now, I guess, and found myself becoming "legal" quite by accident when I needed to make what seemed like a tiny decision about whether I wanted Paypal to calculate sales tax or not. When I looked into it, it became very clear to me that it was imperative that I make sure to register with the IRS & my state & local govt's, and pay taxes properly. I sell very little, and have been teased by people for having a fully legal business for the amount of selling I do, BUT it is a HY-OOOGE comfort to me. As a word of encouragement to others, I highly recommend it. It's a pain while you're figuring things out, but once you get it all set up, it's no big deal to keep rolling with it.

January 3, 2011 | Unregistered CommenterShin Ae

Thanks for sharing this information! I have an Etsy shop and I feel a little clueless as far as taxes go. I will definitely get things figured out for this fresh new year.
Knitting 50 scarves in a week? not quite but I did knit almost 60 pairs of toddler fingerless gloves. over the holidays....Most while watching subtitled foreign movies in the dark on Netflix...

January 7, 2011 | Unregistered CommenterHeidi

Great info. I've been selling on ebay and etsy for a number of years now. Not making a bundle of cash, but I do keep all my records. You can do some simple spreadsheets to keep track of sales and expenses. I worked for the IRS in Customer Service for 30 years and it still gets complicated for me sometimes so y'all done feel back about being overwhelmed. There is some good info available on the IRS website that you should peruse. Just be sure you keep all of your paperwork for a minimum of 3 years. More if you have room to store it. Like someone said, once you get things set up, it's pretty easy to keep it going.

January 17, 2011 | Unregistered CommenterGrandmabarbara

Thanks for this beneficial post and the links. Very helpful, even though I've only ever had one sale so far!

January 25, 2011 | Unregistered CommenterAmy

I didn't realize they WEREN'T already doing this. I have always licensed my tiny little business when I moved to a new city and though sloppy, kept track of what I sold and expenses. Make that VERY sloppy. I throw purchase receipts in a drawer and expense receipts in a folder. At the end of each year, I spend HOURS trying to figure it all out and in the end I always have a nice little business writeoff. I only profited one year but this is not my career or income.

ANYWAY, about 10 years ago, a man knocked on my door from the local tax office, not federal but state. O M G. Seriously I was dying baby clothes when I had time and hadn't filed my business taxes and they came to my door. SO YES it is serious.

January 26, 2011 | Unregistered CommenterMary

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